We Americans are so entranced by the Japanese -- regarding them either as supermen or demons -- that we can't easily see that they make mistakes, too. Well, they do. The current faltering state of Japan's economy is a case in point. The Tokyo stock market is roughly half its peak reached in late 1989 (38,916 on the Nikkei index, which closed Tuesday at 19,918). Land values are declining. In 1991, business bankruptcies rose 66 percent. A dreaded word is being spoken in Tokyo: recession. And Japan's problems are mostly self-inflicted. An orgy of easy credit and speculation drove the economy into a frenzied boom that's now collapsing

There are fears of a wider financial crisis that would ultimately harm the U.S. and world economies. The grimmest outlook involves a continuing drop of stock and land values, which would undermine Japan's banks and curb the lending needed for recovery. For now, this sort of disaster seems unlikely. Japan's unemployment rate is a mere 2.1 percent. A brief slump will bring no great hardship. Economist Robert Feldman of Salomon Brothers in Tokyo thinks growth will increase gradually and average about 2 percent over the next year.

But whatever happens, the punctured boom confounds popular American notions of the Japanese. We see them as a monotonously productive people who disdain all shortcuts to riches. We regard their policies as models of prudence and farsightedness. The imagery is too simple. It won't fit what's now derisively called "the bubble economy": a reference to the hugely inflated stock and land prices of the late 1980s. The period was shaped by private greed and government mistakes.

Government made the biggest blunder. Between 1985 and 1989, the Bank of Japan (Japan's equivalent of our Federal Reserve) kept interest rates too low. The yen was rising on foreign exchange markets, making Japan's exports more expensive abroad. The idea was to stimulate domestic spending to offset a feared loss of exports. The key discount rate dropped to 2.5 percent. Easy credit fueled an explosion of corporate investment in new equipment and factories, residential and office construction.

What ensued was a dizzying cycle of spending and speculation. The construction boom inflated real estate values, because land is so scarce in Japan. Higher real estate prices bloated the stock market, because most major companies have huge land holdings. And a soaring stock market helped companies raise capital to sustain investment spending. Between 1985 and 1990, residential land values in major cities rose 167 percent. The stock market doubled in the two years before its peak. Economic growth in the late 1980s averaged nearly 5 percent annually.

As with all speculative booms, everyone thought success natural and no one imagined the boom would ever end. What finally shut it down was the Bank of Japan's belated recognition that a runaway economy could spawn higher inflation. In late 1989, Yasushi Mieno -- the bank's new head -- began to raise interest rates sharply. Without easy credit, the speculative machine went into reverse. Land prices, the stock market and corporate investment began to slide. The economy slowed dramatically.

The evidence of excess is everywhere. Many construction projects turned out to be duds. The biggest category of losers were apartments containing "one-room mansions," says analyst Alicia Ogawa of S. G. Warburg Securities in Tokyo. These apartments were aimed at workers who might normally commute two or three hours a day into Tokyo or Osaka. The idea was that the workers would live in their luxurious studios during the week and return home on the weekend. "There was simply no real demand for this type of project," says Ogawa.

As for stock speculation, it was rampant. Many of Japan's best-known companies committed vast amounts to "eigyo tokkin" accounts at brokerage houses. These were funds that could be freely invested in the soaring stock market. It was the disclosure last year that many big companies had been guaranteed against losses on these accounts that prompted the resignation of top executives at Nomura Securities, Japan's biggest brokerage house. The head of Daiwa Securities, another brokerage house, recently resigned because his company was involved in a scheme to help a client conceal stock losses.

Finally, some of Japan's banks are clearly overextended. Bad real estate loans and low stock prices have hurt them. Banks' capital is heavily concentrated in holdings of corporate stocks. As stock prices drop, so does bank capital. This weakens the banks' ability to make new loans. Ogawa thinks bank profits could be squeezed for three to five years. But she doubts melodramatic predictions of a major financial crisis. The Japanese banking system, she says, is fundamentally sound.

For us, Japan's slowdown is a mixed blessing. Even if it is mild, it will hurt. Demand for our exports will suffer. After Europe and Canada, Japan is our third-largest market. (And unfortunately, Europe's growth is also stumbling.) Competition from Japanese firms will intensify, because they try to offset weak domestic sales by exporting more. But beyond these immediate effects, there's a more favorable message in the slowdown.

In the 1980s, Japanese companies acquired an aura of invincibility. They often seemed to have endless amounts of inexpensive capital to finance new plants, research and overseas investment. American and European companies appeared to be at a hopeless disadvantage. What we know now is that the Japanese advantage was largely temporary: the effect of easy credit and high profits from the "bubble economy." Japanese profits are now squeezed. Scarce capital is more expensive. Japanese companies face limits. Less overseas investment may ultimately raise the yen's exchange rate, hurting exports.

Japanese companies won't vanish as fierce competitors. Their strengths lie in quality products and technology. They learn from adversity. But the competition isn't as lopsided as American mythology holds. Japan's economy isn't a miracle machine, and the Japanese aren't supermen. They make mistakes, including -- like Americans before them -- believing in their own infallibility.